Ratings giant upbeat over KCB’s future
KCB Group’s acquisition of National Bank of Kenya (NBK) is likely to weaken its financial position in the near term, a leading global provider of credit ratings, research, and risk analysis have said.
Moody’s Investors Service said NBK’s high stock of problem loans and low capital levels would weaken KCB’s financial position but its entities’ profitability and funding profiles would strengthen over the following two to three years, outweighing short-term effects.
“We estimate that KCB Group’s pro forma asset quality would nearly double to 11 per cent from six per cent as of December 31, 2018, because 49 per cent of NBK’s loan book was non-performing,” Christos Theofilou, VP-Senior Analyst and Savina Joseph Associate Analyst said.
KCB intends to tackle impaired loans through write-offs and increased provisioning to reduce risks. The analysts said NBK’s low capitalisation is also expected to lead to a slight deterioration of KCB Group’s capital adequacy, although it will remain above regulatory requirements and that of global peers.
Over the next two to three years, Moody’s Investors Service expects gradually stronger profitability and funding.
“KCB Group will integrate the large number of government deposits on NBK’s balance sheet of Sh58 billion or 20 per cent of the system’s government deposits based on year-end 2017 data, and we estimate that the combined entity will hold around 62 per cent of Kenya’s government deposits,” the analysts’ report said.
They said government deposits will reduce KCB Group’s overall funding costs because they are cheaper and net interest margins and profitability will improve.
KCB Group, the report adds, will have an opportunity to generate additional transactional revenue by leveraging NBK’s large government-related business flows, which will diversify its revenue base.
“Furthermore, although integration costs may initially weigh on operational efficiency, we expect that rationalisation of various operating channels and leveraging technology will produce synergies that lead to greater efficiencies,” the analysts said.
They added that KCB Group’s acquisition of NBK would also benefit Kenya’s other banks because it would consolidate and stabilise an over-banked banking system by removing a distressed bank.